Question 1

State whether the following illustrates the speculative,precautionary or transactions motive for holding money.
(a. )A bond broker holds cash for the possibility of buying a bond whose price is expected to rise.
(b. )John's mother tells him to keep $10 in his pocket any time he goes out in case he needs to put gas in the car.
(c. )Julio withdraws $100 from the bank to buy vegetables at the local organic farm market.
(d. )Mary takes out $50 from the bank to buy lunches during the week.
(c. )As stock prices begin to tumble,investors sell stock and increase their cash holdings.

Accepted Answer

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Question 2

The three functions of money are to serve as: (1)a medium of exchange, (2)a unit of account,and (3)a store of wealth.Briefly explain each of these functions and give an example of each.

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Question 3

The U.S. dollar bills you sometimes have in your wallet are:

Accepted Answer

A) liabilities of the Federal Reserve. 
B) assets of the Federal Reserve. 
C) liabilities of the Federal Reserve until it is spent. 
D) your liabilities if you hold that note.

Question 4

Some colleges charge for student parking. Currently, your college does not charge for parking but the administration announced a possible charge of $2 per day. You are not sure when the new parking policy will start; therefore you decide to keep a $5 bill in your wallet. You hold to $5 for the:

Accepted Answer

A) money creation motive. 
B) precautionary motive. 
C) speculative motive. 
D) impulsive motive.

Question 5

Suppose the required reserve ratio is 0.15. Total bank deposits are $100 million and the bank holds $20 million in reserves. How much more money can the bank create if it does not hold excess reserves?

Accepted Answer

A) $33 million 
B) $66 million 
C) $100 million 
D) $667 million

Question 6

Banks hold people's cash for free, and sometimes even pay for the privilege of holding it, because:

Accepted Answer

A) they are nice. 
B) deposits allow banks to make profitable loans. 
C) the Federal Reserve requires that they do so. 
D) the cash can be deposited at the Federal Reserve Bank to earn interest.

Question 7

Which of the following are examples of financial assets that pay a long-term interest rate?

Accepted Answer

A) Saving deposits and checking accounts 
B) Mortgages and government bonds 
C) Cash and currency 
D) Money and CDs

Question 8

Explain the difference between the way real assets are created and the way financial assets are created.

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Question 9

The measure of money most closely correlated with the price level and economic activity is:

Accepted Answer

A) M1. 
B) M2. 
C) M3. 
D) L.

Question 10

Suppose the banking system has $100,000 in outstanding deposits and actual reserves of $35,000. If the required reserve ratio is 25 percent, the maximum amount the banking system can now add to the money supply is:

Accepted Answer

A) $10,000. 
B) $25,000. 
C) $40,000. 
D) $50,000.

Question 11

Credit cards:

Accepted Answer

A) reduce the value of holding money. 
B) create the need to hold highly liquid assets. 
C) create money. 
D) are financial assets.

Question 12

In order to function as a medium of exchange, money must:

Accepted Answer

A) be backed by gold. 
B) maintain a constant value over an extended period of time. 
C) be backed by some precious commodity. 
D) be generally accepted in exchange for goods and services.

Question 13

If you expect interest rates to rise, you will want to be holding:

Accepted Answer

A) more money because bond prices will likely fall. 
B) less money because bond prices will likely rise. 
C) more money because bond prices will likely rise. 
D) less money because bond prices will likely fall.

Question 14

A reserve ratio of 0.10 means that a bank can lend an amount equal to:

Accepted Answer

A) 10 percent of its deposit liabilities. 
B) 10 percent of its excess reserves. 
C) 90 percent of its deposit liabilities. 
D) 90 percent of its excess reserves.

Question 15

John Deere deposits $1,000 into Lawnmowers Community National Bank.Suppose banks hold reserves of 10% and people hold no currency outside of banks.What will be the amount of new money the banking system can create as a result of John's deposit?

Accepted Answer

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Question 16

Why is the financial sector important in macroeconomic debates?

Accepted Answer

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Question 17

M2 includes which of the following?

Accepted Answer

A) Corporate bonds 
B) Government bonds 
C) Retail money funds 
D) Gold

Question 18

What is the interest rate? How does it relate to the buying and selling of financial assets?

Accepted Answer

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Question 19

One of the three functions of money is to serve as a:

Accepted Answer

A) financial asset. 
B) financial liability. 
C) real asset. 
D) real liability.

Question 20

According to the rule of 72, a savings account with an interest rate of 12 percent will double in value in approximately:

Accepted Answer

A) 3 years. 
B) 6 years. 
C) 8.5 years. 
D) 10 years.

Exam 28: The Financial Sector and the Economy